Can a lender charge interest on interest (compound interest)?
Last updated: 2026-07-10 · Educational content; not legal advice.
Short answer
Only if you agreed to it in writing. Civil Code Art. 1956 says no interest is due unless expressly stipulated in writing, and Art. 1959 says interest that is due and unpaid does not itself earn further interest unless the parties stipulated to capitalize it — or unless it is judicially demanded (Art. 2212). Where interest is charged with no valid written rate, the applicable rate is the legal interest of 6% per annum (Nacar v. Gallery Frames, 2013; BSP Circular 799). A court will strike compounding that is unconscionable under Art. 1306 (Medel v. CA). LabanPH can help you demand a recomputed Statement of Account.
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Frequently asked
My loan had no written interest rate but they charged interest — is that valid?
Under Civil Code Art. 1956 no interest is due unless stipulated in writing. If interest was imposed without a valid written rate, only the 6%-per-annum legal interest applies from default (Nacar v. Gallery Frames), and anything collected above that can be challenged.
Can penalties be added on top of interest and then earn interest too?
Penalties and interest are distinct charges. Interest already due does not compound automatically (Art. 1959); it earns further interest only by written stipulation to capitalize it or from judicial demand (Art. 2212). Stacked, undisclosed charges are challengeable and reviewable for unconscionability.
What can I do about a ballooning balance?
Demand an itemized Statement of Account showing principal, interest, penalties, and payments credited. If the compounding has no written basis or is unconscionable, ask for a recomputation at 6% per annum and escalate to the SEC or BSP.
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